- Epclusa should improve sales in HCV. It is coming in cheaper than Harvoni and can be used on both genotype 2 and 3 patients.
- Expect to see Gilead's TAF range of HIV treatments continue to increase its sales numbers.
- Technically biotech looks very strong. The sector's fundamentals and rising valuations will act as a tailwind for Gilead's share price.
Even with Gilead Sciences (NASDAQ:GILD) trading at well under $80 a share, the consensus target price for the stock still remains at around $103 a share. To give you an idea of how oversold the stock is at present, the company's earnings multiple is currently at 6.8 which is way below Gilead's five-year average of 21. Will we ever see the company with an earnings multiple of over 20? It is still doubtful, but I still maintain this stock under $80 a share is a strong buy.
The street, by definition, has always taken annual revenue growth as a defining metric in valuing stocks. The company raced to well over $32.64 billion in revenues 2015. However, with HCV sales slowing, the company revised its yearly guidance at the end of the second quarter and now expects to report somewhere in the region of $30.50 million for its full fiscal 2016. Obviously not what the market wanted. However as we have seen with the likes of Apple (NASDAQ:AAPL), one indifferent year does not make or break a company. Therefore I expect Gilead's revenues to come roaring back in 2017 and 2018 which will return its share price to well over $100 a share once more.
HCV Sales Will Eventually Settle Down
First, we have to talk about the elephant in the room which is the company's sales in HCV. The second quarter this year was particularly difficult as HCV product sales were down by over 30% on a rolling quarter basis. There are a few things at play here that is affecting Gilead's biggest earning division. First of all the company has stiff competition from the likes of Merck and Viekira. One has to remember that Gilead's main drugs in this space (which are Sovaldi and Harvoni) have a premium pricing over the competition. Secondly in the US (where Gilead's HCV sales are the most dominant), the government has restricted access to some patients suffering from this condition. Gilead believes that eventually this problem will be sorted out once governments understand the cost savings involved in starting serious patience quickly with the treatment.
Epclusa Will Have Wider Appeal Plus It's More Competitively Priced
Personally, I feel that the whole hepatitis C Market is merely going through an adjustment period in 2016. Why? Well, screening of patients continue to rise which means that companies selling these drugs are going to have consistent patient inflow over the next few years. One such drug in this space that investors should be watching closely is Epclusa. This product is priced lower than its fellow drugs (Sovaldi and Harvoni) and can be used on every grade of hepatitis C (1 - 6) whereas Harvoni and Sovaldi can't.
The Market Is Underestimating What TAF-Based Regimens Will Bring To The Table
Therefore what I see transpiring in the near term is the pace of Gilead's HCV negative sales growth declining before finally bottoming out. Then hopefully the market will reward the stock with sustained growth in the HIV side of the business. The TAF (tenofovir alafenamide) based products helped Gilead's HIV product sales storm to $3.1 billion in the second quarter and I believe the growth is just getting started here. Why? Well, look at what is coming down the track. Bictegravir should be approved by next year which means this integrase inhibitor should be able to compete head on with the likes of Glaxo's Tivicay, which incidentally has been growing like gangbusters recently. Investors who are worried about Gilead's TDF drugs coming off patent from 2018 onwards should watch the growth of Genvoya in the next few quarters. Genvoya (after just been approved last November) reached over $300 million in sales in the second quarter this year. Bears have stated that its sales have only been "switchers" to date but I maintain it will start to steal market share from competitors due to attractive pricing and an improved safety profile over previous offerings.
Biotech Fundamentals Look Very Strong
From a technical point of view, biotech has been making higher highs all year. Pullbacks have been short-lived and rallies have always taken out their previous highs. Gilead should benefit from rising biotech valuations going forward.
Volume has remained elevated in the triple leveraged ETF Direxion Daily S&P Biotech Bull 3X ETF (NYSEARCA:LABU). This usually means that the bear market we have had in biotech since mid-2015 is over.
To sum up, when one combines biotech's fundamentals along with the emergence of TAF-based regimens and Epclusa, revenue growth could return for Gilead sooner than many currently think. I still maintain downside risk is limited in this stock so I would use any sell-offs as an opportunity to scale into a long position.